Heat costs likely to soar

Higher prices for oil, natural gas expected to push bills up 30%

Fears of `double whammy'

Increased demand in healthy economy drives fuel expenses

July 05, 2000|By NEW YORK TIMES NEWS SERVICE

After a summer of high gasoline prices, consumers may be in for another shock this winter, as the rising cost of heating oil and natural gas threatens to make it significantly more expensive to heat U.S. homes.

With demand for fuel and electricity soaring, natural gas prices have nearly doubled in the past year, to their highest levels in more than a decade. Heating oil prices have risen 10 percent in the past month. This winter, many homeowners could discover that it costs at least 30 percent more to heat their homes than it did last year.

Even with a new pledge Monday by Saudi Arabia, the world's leading oil exporter, to increase production to help reduce global petroleum prices, the effects of such a move on U.S. energy costs remain unclear at best.

"What you need to fear is the double whammy," said Steven Parla, a natural gas analyst at Credit Suisse First Boston. "That's when prices rise 30 percent and it's cold, so you use 40 percent more gas."

Although the prices of all fuels have risen recently, natural gas is affected by a variety of factors, including its use in electric power generation and in heavy industry, in addition to home heating. Used in power plants in the summer to churn out electricity to keep air conditioners whirring, natural gas warms slightly more than 50 percent of United States homes in winter, mainly in the Midwest, Sunbelt and Rocky Mountain states, according to 1997 census figures.

More than 90 percent of new houses in the United States are outfitted to use gas, according to Keyspan, the supplier of natural gas to much of New York City and Long Island. Only about 10 percent of homes burn heating oil, a large proportion of them concentrated in the Northeast, where oil prices rocketed last winter during a stretch of bitter weather.

Closer to winter, rising heating fuel prices are likely to generate political debate, much as gasoline prices have done recently. Consumer anger over gasoline prices, especially in the Midwest, has made the cost of energy an issue in the presidential campaign and led to congressional hearings and federal inquiries. Rep. Jim Leach, an Iowa Republican, has asked the Federal Trade Commission to monitor the increases in heating oil and natural gas. The FTC declined to comment on the request.

The price increases have been caused by an imbalance between supply and demand that probably will not right itself soon.

Energy use is an important indicator of an economy's health. U.S. industry uses prodigious amounts of oil, gas and electricity each year, and consumers are buying larger houses and cars and other products that demand more fuel.

At the same time, critics of the government charge that a series of Republican and Democratic administrations has failed to construct a sound energy policy to take into account shifts in demand and the complexities of the supply of oil and gas. Now, the Clinton administration and Congress are scrambling to find ways to undo or slow the increase in fuel prices.

"When it comes to energy, we only seem to wake up when there's a crisis," said Gordian Raacke, executive director of the Citizens Advisory Panel, an energy watchdog group in Long Island.

High fuel prices have yet to slow the economy, and, adjusted for inflation, domestic prices are much lower than can be found in the rest of the world.

Wholesale heating oil prices are about 84 cents a gallon, compared with 49 cents a year ago. Wholesale natural gas prices are about $4.44 per million British thermal units (Btus), compared with $2.39 one year ago. Some analysts say natural gas prices will decline while others contend that they have yet to peak.

A decision to cut back production by the Organization of Petroleum Exporting Countries last year spurred the ascent of crude oil prices, which helped push up heating oil prices. At the same time, demand blossomed. Refineries usually begin in summer to store distillate, which includes heating oil and diesel fuel. But this year, surging demand for diesel has drawn distillate out of refineries as quickly as it has flowed in, analysts say.

To worsen matters, a refinery in Kuwait that supplies a disproportionate amount of distillate to world markets was damaged by an explosion last week, which markedly reduced supply at a time of rising demand. The Energy Department reported last week that inventories of distillate were 21 percent lower than last year. This situation was unlikely to change even with the Saudi announcement Monday about higher production.

Stocks of natural gas are 10 percent to 15 percent below levels of a year ago. The shortfalls are partly the result of conditions over the past couple of years, when oil and gas prices were so depressed that few energy companies were drilling for new supplies. As prices rose for oil and gas, however, companies speedily resumed drilling. There are 65 percent more active drilling rigs in North America than a year ago, and 75 percent of them are for natural gas, according to the Natural Gas Suppliers Association, a trade group.

Natural gas is used in manufacturing by its primary consumers, heavy industry, including steel and fertilizer producers. But natural gas prices are also reacting to shifts in electricity generation and to increases in power consumption.

About 25 percent of the country's energy needs are met by natural gas. That proportion is expected to grow to about 28 percent in three years.